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Follow the Leader

<i>Project work is touch-and-go and your industrial MRO business is a bit soft. Looking for a hot market? Think residential.</i>

Two years ago, who would have thought home building would be the strongest segment of the construction market? McGraw-Hill Construction says spending on residential construction is on pace to increase 21% for single-family housing and 19% for multi-family — compared to a measly 2% increase for spending in the construction market as a whole in 2012.

Admittedly, any increase in residential construction spending is off some historically low numbers. According to data from the National Association of Home Builders (NAHB), Washington, D.C., single-family housing starts in 2011 totaled 434,000 — down a whopping 71% from a peak of 1.47 million in 2006. NAHB expects 2012 single-family housing starts to increase 19% this year to 519,000 and another 27% in 2013 to 668,000. The association says market drivers including low interest rates, declining foreclosure rates, sales of existing homes and pent-up demand from first-time home buyers are all now in place for what should be some good years of growth for home builders.

Admittedly, the housing market is not exactly in the sweet spot for most electrical distributors, manufacturers and independent manufacturers' reps. According to Electrical Wholesaling data, it accounts for 17% of the average distributors sales, far less than the commercial construction market or industrial MRO business, which have always been dead-center in the electrical market's wheelhouse. While relatively few distributors, manufacturers or reps focus on the residential market for the bulk of their business, don't sell this market segment short. The number of anticipated housing starts for 2012-2013 may be a fraction of what was being built during the 2006-2008 housing construction explosion, but the impact of any major growth in home building will have a very positive effect on the overall U.S. economy. Here's why.

Housing is a leading market indicator

When the June 2012 housing data for total housing starts (single-family and multi-family) showed a 6.9 percent increase to a seasonally adjusted annual rate of 760,000 units, it was the fastest pace of new-home construction since Oct. 2008. David Crowe, the chief economist for the National Association of Home Builders (NAHB), Washington, D.C., said at the time of that announcement, “This is one more piece of evidence that housing is starting to take back its traditional role of leading the nation out of recession, and tracks with our forecast for continued improvement in new construction through the end of this year.”

Housing is an important leading indicator for the electrical construction market because once home buyers move into new housing developments, they need places to shop, play and send their kids to school. As new housing developments are built, the commercial construction follows. That includes retail strip malls, gas stations, movie theaters, fast-food restaurants, schools and every other type of commercial construction project you can imagine.

The housing recovery is enticing some investors to jump back in the stock market

In the investment arena, attitude is everything. And there's lots of money sitting on the sidelines right now because many investors still don't think stocks are safe investments because of the volatile swings that have shaken the stock market over the past few years.

But gutsy investors who in the past six months decided the housing recovery is for real and invested in some of the publicly held home building companies are reaping the benefits. At press-time, the stock prices of eight of the 10 largest public home builders were up no less than 37% since Jan. 1, and big-name national and regional builders including D.R. Horton, Pulte Group, Lennar Corp., KB Home, Hovananian, Ryland, MDC Holdings and Toll Brothers, are all up more than 40% year-to-date. And a recent Goldman Sachs investment report said U.S. home builders are now an “attractive investment,” and that “the super-cyclical housing market has turned and a strong recovery in new-home sales is ahead.”

All business is distinctly local in the housing market, and you may not be seeing any improvement just yet in your neighborhood. But the trickle-down effect from a healthy housing market on commercial building will eventually lead to a much more stable overall U.S. economy. After what home builders have been through the last few years, who would have imagined that?

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